This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.

Wednesday, October 7, 2015

When is a Director Independent?

When is a Director
Independent?

In a decision rendered last
Friday, the Delaware Supreme Court addressed when a director may be considered
“independent,”, as contrasted with “interested,” consequent to a long-standing
personal relationship.This is an
important decision in that it explicates facts upon which a close friendship
was found to render a director interested.Delaware County Employees
Retirement Fund v. Sanchez, No. 702, 2014, 2015 WL 5766264 (Del. Oct. 2,
2015).

Sanchez Energy Corporation,
which is publicly traded, has as a 16% shareholder members of the Sanchez
family.In turn, that same family
controlled Sanchez Resources LLC. The transaction at issue involved Sanchez
Energy paying $78 million to allow Sanchez Resources to cash out a private
equity investor, acquire certain properties, capitalize a joint venture with
Sanchez Energy and fund a cash payment of $14.4 million to Sanchez
Resources.Challenged in a derivative
action, it was alleged that these transactions were improper as generally being
advantageous to Sanchez Resources while depleting the assets of Sanchez Energy.

The complaint filed in the
derivative action had been dismissed by the Chancery Court, it holding that
there was no basis for excusing demand in that, inter alia, a majority of the
members of the board of Sanchez Energy were independent and had approved the
transaction.That board was comprised of
five individuals, including two members of the Sanchez family.Clearly they were interested. The question
was whether the other directors were independent under the test set forth in Aronson v Lewis, 473A.2d 805 (Del.
1984).

In prior decisions including Beam v Stewart, 845A.2d 1040 (Del.
2004), it had been determined that the mere fact that the directors moved in the
same social circles and describe one another as friends did not rebut the
presumption of independence.Here,
however, Director Jackson had been friends with the head of the Sanchez family
for some 50 years.Further, his primary
employment, as well as that of his brother, was at a company that was
controlled by the senior Sanchez.In
addition, the director fees paid to Jackson constituted some 30 to 40% of his
total income.

In assessing independence:

It is important that the trial court
consider all the particularized facts plead by the plaintiffs about the
relationships between the director and the interested party in their totality
and not in isolation from each other, and draw all reasonable inferences from
the totality of those facts in favor of the plaintiff’s.

Based upon the particularized
facts of this case, they “create a reasonable doubt about Jackson’s
independence.” A majority of the Sanchez Energy board not being independent,
the suite may proceed.